OBR warns UK could enter into recession over no-deal Brexit

The Office for Budget Responsibility (OBR) has said GDP will fall by 2% if the UK leaves without a no-deal Brexit by the end of 2020, meaning we will fall into a recession.

The OBR has said the economic impact of a no-deal will contract the UK economy in 2020 and set to recover by 2021.

Currently goods traded with the EU have zero tariffs this will change to 4%.

The OBR said In the executive summary, “Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.

“Together, these push the economy into recession, with asset prices and the pound falling sharply. Real GDP falls by 2% by the end of 2020 and is 4% below our March forecast by that point.

“Higher trade barriers also slow growth in potential productivity, while lower net inward migration reduces labour force growth, so potential output is lower than the baseline throughout the scenario (and beyond).

“The imposition of tariffs and the sterling depreciation raise inflation and squeeze real household incomes, but the Monetary Policy Committee is able to cut bank rate to support demand, helping to bring output back towards potential and inflation back towards target.”

In a no-deal scenario will push up public sector borrowing by £30bn per year, as the government will receive leass money from income tax, National Insurance and capital taxes. By 2024 debt will be higher by 12%.

The OBR report states, “Borrowing is around £30bn a year higher than our March forecast from 2020-21 onwards. Lower receipts – in particular income tax and NICs (due to the recession) and capital taxes (due to weaker asset prices) – explain most of the deterioration.

“These are partly offset by lower debt interest spending (thanks to lower interest rates and RPI inflation) and the revenue raised customs duties (which are treated as EU rather than UK taxes in the baseline).

“Higher borrowing and the assumed rollover of Term Funding Scheme loans leave public sector net debt around 12% of GDP higher than our March forecast by 2023-24.”

Chancellor Philip Hammond said the report shows even the “most benign version” of a no-deal which will lead to a “very significant hit” to the economy.

Hammond told Reuters, “But that most benign version is not the version that is being talked about by prominent Brexiteers.

“They are talking about a much harder version, which would cause much more disruption to our economy, and the OBR is clear that in that less benign version of no-deal the hit would be much greater, the impact would be much harder, the recession would be bigger.

“So, I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now.”

Markus Kuger, Senior Economist at Dun & Bradstreet said, “Although the latest ONS data shows an incremental growth across all sectors of the economy in May, lack of clarity around Brexit coupled with the turbulent political environment is having an inevitable impact on businesses operating in the UK. Dun & Bradstreet data shows a rise in the number of business failures in some sectors, including retail and construction, and our economic analysis suggests that a significant upturn in growth is unlikely, with any progress sluggish at best.

“Our latest country risk rating outlook for the UK remains at ‘deteriorating’ and our baseline scenario predicts a general election before the end of the year. With so much still on the table, planning for the various potential Brexit scenarios is a daunting task for many businesses. Having a full view of all existing customer and supplier relationships to assess potential impact, and using data to identify new opportunities will be key to ensuring successful business performance.”